ZILLOW, INC. ACQUISITION OF TRULIA, INC. 1 Zillow, Inc. Acquisition of Trulia, Inc. Thomas Bryan Smith, Serena Dang, and Danica Fiew University of North Texas MBA
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 2 Zillow, Inc. Acquisition of Trulia, Inc. On July 28, 2014 Zillow Inc. (Z) announced the purchase of Trulia, Inc. (TRLA) in a $3.5 billion stock-for-stock transaction. The deal will position the combined entity as the largest company in online real estate advertising. In this paper we, the University of North Texas MBA team, will analyze the details of this deal and provide our projections for the future of this stock. We will conclude with recommendations for trades based on this analysis. Industry Background Online Real Estate The online real estate industry is in the business of creating a repository of home listings and tools for home buyers to utilize in their search for a new home. Companies in this industry make a majority of their revenues off of online advertising expenditures from realtors and companies targeting these home buyers. As more consumers are becoming dependent on the Internet for information the industry is realizing an increase in the value of online advertising to access a larger customer base. Currently online channels account for only 56% of total advertising expenditure in real estate i. Roughly $12 billion is spent annually on real estate advertising, with Zillow and Trulia accounting for less than 4% of those advertising dollars ii. This leaves plenty of room for continued growth, and creates a positive environment for success for firms like Zillow and Trulia. Even more increasingly important in the industry will be the development of mobile platforms. In a world like today where technology is omnipresent and access to immediate information trumps all else, tremendous value will come from home buyers being able to discover a property on the street and immediately research that property on mobile real estate
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 3 applications. Online real estate companies that can provide a mobile application will continue to attract and build a large customer base, which is of utmost importance for an industry like this. The online real estate industry is highly fragmented industry with a vast array of websites and companies for potential home buyers to choose from. There are a handful of large national players, but also a variety of smaller, local players. Significant value comes from having a big name and big market share in the industry. The majority of consumers are more likely to trust a large, reputable and recognizable brand name to assist them in their search for a new home. The environment for traditional real estate agents is also experiencing a shift. Real estate agents are drawn to utilizing online real estate advertising because it can give them access to a larger base of potential customers than can be reached by print advertisements. Companies in the online real estate industry can also provide realtors with a centralized database for all of their leads iii. By increasing the lead cultivation cycle with automated tools, realtors would become more dependent on a platform that combines advertising, sales qualification, and a prospect database all into one. Even more valuable to realtors is data from potential consumers that will tell realtors about home buying trends. The increased value of Big Data will provide tremendous opportunities for new revenue growth for companies in this industry. Companies within the industry can potentially generate new revenue streams by selling this valuable data to realtors and other companies. The real estate market is currently recovering from the housing market crash in 2008 that lead to one of the largest economic recessions in United States history. Recently the market has been experiencing a steady increase in home buying. We cannot neglect to mention the inevitable connection of the health of the housing market to the health of the economy. When the economy is strained and experiences a significant decline, the housing market experiences a
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 4 proportional dip. This is an important environmental condition for companies in the industry to keep in mind as they plan for the future. However, even if the economy were to take a turn for the worst again, companies in this industry will likely not see an entirely devastating effect on their revenues. When fewer home buyers existing in the market, realtors and advertisers will compete more aggressively for remaining customers. This will result in a continued steady revenue stream for these companies. Another external factor affecting the industry is the shift in home buying from the new generations of home buyers, the Gen Xers and the Millenials. Many members of these younger generations are stalling their first home purchases, even when the buy is affordable, claiming they prefer the ease of renting iv. This micro trend is occurring on a very small scale, but is interesting to note because of the opportunity it presents for further revenue growth. If consumers become less interested in home buying, and more interested in renting, the companies in this industry could provide separate rental and commercial property listing services that would create yet another way to generate revenue growth. In conclusion, this industry is currently experiencing an environment that is extremely fertile for growth. Below we will discuss in detail how Zillow s acquisition of Trulia uniquely positions the company to capitalize on this advantageous environment. Details v The Deal Zillow s announcement of the acquisition of Trulia includes the following technical details: $3.5 billion, all-stock Zillow acquires Trulia
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 5 Trulia shareholders will receive 0.444 shares of Zillow for every Trulia share of Class A common stock (33% ownership) Zillow shareholders of Class A and Class B common stock will receive 1 share of the new company for 1 share of the legacy company (67% ownership) CEO Pete Flint will remain the CEO of Trulia, but will report to Zillow CEO, Spencer Rascoff A new 10 member board will be created with 8 representative from Zillow and 2 representatives from Trulia Zillow and Trulia will retain their separate brands; only integrate some of the sales, marketing, and advertising functions Provisions vi Zillow can walk away from the deal at any time for a $150 million termination fee if the company feels limited by antitrust or government requirements Trulia can walk away from the deal for a termination fee of $69.8 million Trulia will face significant limitations on operations during the 18 months leading up to the deal termination date. During this time frame Trulia cannot: o Complete new acquisitions o Make capital expenditures o Borrow money o Enter into major employment agreements, except to fill immediately necessary voids o Begin any intellectual property actions
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 6 Who gets the better deal? From looking at the facts of the deal, one could conclude that Zillow is getting the better of this deal in terms of a greater stake of ownership in the new company and greater flexibility to walk away from the transaction. However, our team believes that neither company has an advantage over the other, and neither company gets a better deal. With this transaction Zillow, Trulia, and all stakeholders and shareholders will benefit. This acquisition will create a new company that holds a 61% share of the online real estate market vii. Economies of scale and scope gleaned from this transaction will enable leveraging of resources across both companies. Additionally, Trulia and Zillow bring unique value to the table. Both companies are experiencing revenue growth beyond analyst and company expectations. This year Zillow is expecting increase revenue by 58% over last year. Trulia is expecting revenues to increase 76% over last year viii. Neither company carries more weight in revenues than the other. Additionally, each company has a unique user base with very little consumer overlap. Approximately one half of Trulia s monthly visitors do not visit Zillow, and approximately two thirds of Zillows users do not utilize Trulia ix. Even more, both companies have unique critical intellectual property, including tools, consumer databases, and housing marketplace information. Zillow brings a unique and patented mortgage-estimator tool, Zestimate to the deal, and Trulia brings patented realtor software, interactive maps, and visual tools x. Lastly, this deal will eliminate legal costs for both companies, as they have been entangled in a lawsuit over patent infringement since September of 2012 xi.
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 7 Challenges Zillow and Trulia will face many challenges that will be critical to the success of the stock and the success of the company. Although there are antitrust concerns from the government, the acquisition will likely not be considered a significant threat to pricing power and consumers. Notably, previous acquisitions of large competitors by both Zillow and Trulia have faced no antitrust intervention. Furthermore, the residential real estate industry is fragmented and highly local, and therefore is not largely threatened by market dominance xii. The largest challenge facing this acquisition is the integration plan, or rather, the lack thereof. Zillow and Trulia have announced plans to continue to operate as separate brands, and will likely retain most of their employees xiii. Zillow CEO, Spencer Rascoff, announced on July 28, 2014 that the two companies will integrate only services such as sales and marketing, and some advertising functions xiv. This announcement creates concerns for a number of reasons. The most valuable mergers and acquisitions are those that are accretive. The goal of merging two entities is to create exponentially more value operating as a combined entity than each company could produce independently. This exponential value is achieved through combining shared resources and reducing redundancies, thereby creating a more viable cost structure. Controlling cost structures is critical to merger success, and Zillow is not yet realizing this to full potential. Because of vague and ambiguous announcements of integration plans, investor confidence has been wavering, as has been evidence by the recent dip in stock price. Zillow and Trulia s current executive team seems to lack experience in merger integration. Investor confidence could be restored by implementing a new, third-party CEO with experience in mergers and acquisitions, or by hiring a Post Merger Integration (PMI) team that would help the company get the most out of merger synergies.
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 8 Though the two companies are experiencing substantial increases in revenues, both companies have reported negative earnings before tax and interest, and also negative net incomes in their most recent income statements from December 2013 xv. Both companies are coming into this deal already operating at a loss, with profitability being confined by high cost structures and the cost of funding innovation. This is often the case in high-growth markets, and yet another testament to why it is so critical for Zillow and Trulia to integrate further. With any merger or acquisition, culture integration is key to success. Investors may have some concerns over the success of integrating two companies that have long been each other s top competitor. Opportunities This deal has tremendous opportunity for success, if it is managed correctly. As the #1 and #2 companies in the industry Zillow and Trulia will combine to hold an overwhelming majority of market share in online real estate listings, which gives them a first-mover advantage and positions them as industry leaders xvi. Users are more inclined to visit the largest, most reputable sites, and the increase in users will drive increased revenues from realtors will to pay more to access this growing user base. Even more beneficial are the unique offerings that Zillow and Trulia bring to the table. Zillow and Trulia each have a unique user base with very little consumer overlap, as previously mentioned above. Both companies also own unique intellectual property. Zillow and Trulia were one of the firsts in the industry to develop and patent unique technological features such as Zillow s Zestimate home mortgage feature and Trulia s crime heat map xvii. These unique technological features are prime differentiators from competitors in the industry. Zillow and Trulia are positioned to not only lead the market in terms of market share and revenue, but also
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 9 in terms of innovation and technological tools, which will help drive a stronger competitive advantage. The company s access to Big Data is very promising. Big Data can be leveraged to fuel innovation within the company, and it can also be sold to other companies to provide another revenue stream. The company must share their unique data with each other in order to drive further development, but this will require significant integration efforts to achieve these synergies. In fact, none of these strengths will help the company if the company does not implement structures that will allow it to integrate properly and to leverage these benefits to best of its ability. There are two additional strategic directions that could provide value for the company. Both Zillow and Trulia could benefit from expanding their core competence in home buying to create a sustainable core competence in rental and commercial properties. Increasing market segmentation through expanding further in these types of listings would create yet another revenue stream for the rapidly growing company. This keeps the company diversified so it can survive better, even in times of economic downturn. If less people are buying houses, then it is likely they are now renting. Therefore, although the company may be losing the home buyer user traffic due to environmental trends, they could gain those users back as part of the renter market traffic. Furthermore, a competency in rental properties would accommodate any shift in generational trends, such as the shift trends of the Millenials in home buying, mentioned above in our industry analysis. Competition An Indicator of Future Industry Success On September 30, 2014 News Corp announced that they would purchase the third-ranked online real estate mogul, Move, Inc xviii. This move follows the pattern of industry consolidation
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 10 that Zillow and Trulia began. Although this deal will position Move, Inc. to have significantly less market share than Zillow and Trulia combined, the deal demonstrates the large potential that the online real estate market has. News Corp has announced that they will fully integrate Move, Inc. into their portfolio to achieve the ultimate benefits of synergies, cost reduction, and leverage of News Corp s advertising competencies. Because of this strategy, it appears that investors have more faith in News Corp s acquisition plan than they currently have in Zillow s acquisition plan, as evidenced by Move s stock price, which has risen sharply and is continuing to maintain value xix. Future Outlook Wall Street investors appear to lack confidence with the integration and growth plans that have been communicated in the Zillow and Trulia deal thus far. This has been evidenced by the behavior of both Zillow and Trulia s stock prices since the announcement xx. When Zillow announced the acquisition, both stock prices skyrocketed, representing the enormous potential this deal holds. However, shortly after the initial announcement, the stock price of both companies began to decline steadily. Analysts were becoming concerned about the realization of merger synergies before News Corp entered the picture. This decline was hastened by the announcement of News Corp s acquisition of Move Inc. This decline in stock price should concern the executive management team and board of directors at Zillow, but should also excite potential long-term investors as they now have an opportunity to buy into a promising company for a much lower price than what it should be valued at.
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 11 Projections We expect that the stock prices of Zillow and Trulia will continue to decline, especially if Zillow and Trulia do not provide clearer and more consistent information about merger integration plans. This will have tremendous implications for both short-term and long-term investors. Many short-term arbitrage investors will continue to sell their stock because they are concerned that it will not make them a quick return. This will cause the stock price to plummet even further, which makes it a perfect time for long-term investors to buy in. Because of the aforementioned benefits, we firmly believe that this stock will be a worthwhile investment in the long-run. Whether or not the company decides to pursue deeper integration and leveraging of resources, there are too many benefits surrounding this deal for it to fail. This combined company is facing a perfect storm of sorts that will only be positively exacerbated by finding further merger synergies. Recommendations If our analysis of the benefits of this deal are not enough to increase investor confidence in this stock then perhaps past performance will aide. Over the past five years the price of Zillow stock has quadrupled and the price of Trulia stock has doubled xxi. With merger synergies being realized these prices will only continue to go up as they have for the past five years. In summary, as the deal currently stands this stock will provide a significant return in the long-run. The deal will provide even stronger returns if the company can communicate integration plans successfully and get the most out of merger synergies. With stock prices so low at this current moment, long-term investors would be wise to take advantage of such a tremendous opportunity. Buy now or forever hold your peace.
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 12 Appendix A Table 1.0 US Digital Ad Spending by Channel, 2012-2018 xxii Table 2.0 Advertising Media to Watch xxiii
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 13 Appendix B Chart 1.0 Zillow Stock Price Over 6 Months xxiv Chart 2.0 Trulia Stock Price Over 6 Months xxv
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 14 Chart 3.0 Move Stock Price Over 6 Months xxvi i Corbett, J. (2014, January 30). Why Digital Marketing Fails for the Real Estate Industry. BoomTown!. Retrieved November 2, 2014, from http://boomtownroi.com/why-digitalmarketing-fails-for-the-real-estate-industry/ ii Garrison, T. (2014, September 10). FTC approval of Zillow-Trulia deal hinges on agent advertising. Housing Wire. Retrieved on November 2, 2014, from http://www.housingwire.com/articles/31321-ftc-approval-of-zillow-trulia-deal-hinges-onagent-advertising iii See (Corbett, 2014) above, i. iv Mullins, D. (2014, July 17). Study: Millenials can afford homes, but aren t buying. Aljazeera America. Retrieved November 2, 2014, from http://america.aljazeera.com/articles/2014/7/17/millennials-homebuyingrenting.html v Zillow Announces Acquisition of Trulia for $3.5 Billion in Stock. (2014, July 28). PR Newswire. Retrieved on November 2, 2014, from http://investors.zillow.com/releasedetail.cfm?releaseid=862266 vi Solomon, S. (2014, July 31) In Real Estate Listings Deal With Zillow, Trulia Bears Most of the Risk. The New York Times DealBook. Retrieved November 2, 2014, from http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillowcomes-out-on-top/?_r=0 vii De La Merced, M. (2014, July 28). Zillow to Buy Trulia for $3.5 Billion in All-Stock Deal. The New York Times DealBook. Retrieved November 2, 2014, from http://dealbook.nytimes.com/2014/07/28/zillow-to-buy-trulia-for-3-5-billion/
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 15 viii Cao, J. & Tam, P. (2014, July 28). Zillow to Acquire Trulia for $3.5 Billion in Stock. Bloomberg Business. Retrieved November 2, 2014, from http://www.bloomberg.com/news/2014-07-28/zillow-to-acquire-trulia-for-3-5-billion-instock.html ix See (Zillow Announces, 2014) above, v. x Trulia Launches Crime Maps to Add Insight and More Complete Data to American Neighborhoods. (2011, June 2). Trulia. Retrieved November 2, 2014, from http://info.trulia.com/index.php?s=32055&item=106144 Zestimate. (n.d.). Zillow. Retrieved on November 2, 2014, from http://www.zillow.com/zestimate/ xi Cook, J. (2012, September 13). Zillow sues Trulia for patent infringement, escalating bitter real estate rivalry. Geek Wire. Retrieved November 2, 2014, from http://www.geekwire.com/2012/bitter-rivalry-escalates-zillow-sues-trulia-patentinfringement/ xii Garrison, T. (2014, July 30). Wall Street doesn t see antitrust hurdles for Zillow s Trulia acquisition. Housing Wire. Retrieved November 2, 2014, from http://www.housingwire.com/articles/30853-wall-street-doesnt-see-antitrust-hurdles-forzillows-trulia-acquisition xiii Lerman, R. (2014, July 28). Will Zillow see big layoffs from Trulia merger? Puget Sound Business Journal. Retrieved November 1, 2014, from http://www.bizjournals.com/seattle/blog/techflash/2014/07/will-zillow-see-big-layoffsfrom-trulia-merger.html?page=all xiv See (Lerman, 2014) above, xiii. xv Trulia, Inc. Income Statement. (2013, December) Yahoo Finance. Retrieved on November 2, 2014, from http://finance.yahoo.com/q/is?s=trla+income+statement&annual Zillow, Inc. Income Statement. (2013, December) Yahoo Finance. Retrieved on November 2, 2014, from http://finance.yahoo.com/q/is?s=z+income+statement&annual xvi Davidson, J. (2014, July 28). What a Zillow/Trulia Merger Might Mean for Consumers. Time Money. Retrieved November 2, 2014, from http://time.com/money/3047329/zillow-truliamerger-consumers/ xvii See (Trulia Launches, n.d.) and (Zestimate, n.d.) above, x. xviii Bloomfield, D. (2014, September 30) News Corp. to Buy Owner of Realtor.com for $950 Million. Bloomberg Business. Retrieved November 2, 2014, from http://www.bloomberg.com/news/2014-09-30/news-corp-to-buy-real-estate-businessmove-in-950-million-deal.html xix Move Stock. (n.d.). Yahoo Finance. Retrieved November 2, 2014, from http://finance.yahoo.com/echarts?s=move+interactive# xx Trulia Stock. (n.d.). Yahoo Finance. Retrieved November 2, 2014, from http://finance.yahoo.com/echarts?s=move+interactive# Zillow Stock (n.d.). Yahoo Finance. Retrieved November 2, 2014, from http://finance.yahoo.com/echarts?s=move+interactive# xxi See (Trulia Stock, n.d.) and (Zillow Stock, n.d.) above, xx. xxii Total US Ad Spending to See Largest Increase Since 2004. (2014, July 2). emarketer. Retrieved November 2, 2014, from http://www.emarketer.com/article/total-us-ad- Spending-See-Largest-Increase-Since-2004/1010982
ZILLOW, INC. ACQUISITION OF TRULIA, INC. 16 xxiii Special Report Advertising and technology. (2014, September 13) The Economist. Retrieved November 2, 2014, from http://www.economist.com/news/special-report/21615869- technology-radically-changing-advertising-business-profoundconsequences?fsrc=scn/fb/wl/vi/littlebrother xxiv See (Zillow Stock, n.d.) above, xx. xxv See (Trulia Stock, n.d.) above, xx. xxvi See (Move Stock, n.d.) above, xix.